Many tax preparation firms offer their clients a refund anticipation loan (RAL).
ID: 2981303 • Letter: M
Question
Many tax preparation firms offer their clients a refund anticipation loan (RAL). For a fee, the firm will give a client his refund when the return is filed. The loan is repaid when the IRS sends the refund directly to the firm. Thus, the RAL fee is equivalent to the interest charge for a loan. The schedule in the table is from a major RAL lender. Use this schedule to find the annual rate of interest for a $4336 RAL, which is paid back in 34 days. RAL Amount RAL Fee $0 - $500 $29 $501-$1000 $39 $1001-1500 $49 $1501-$2000 $69 $2001-$5000 $89 What is the annual rate of interest for this loan?Explanation / Answer
$89 on $4336 is 0.02%. 34 days = 34/365 of a year, so just using simple interest, it's 365/34 = 10.7 * 0.02% = 0.214 % per annum. It's actually worse than that, because they deduct the fee up front, so it becomes 89/4247 * 365/34 = 2.24 = 2.24+0.214= 2.454%.